Political Entrepreneurs

The Economic Engine of Political Change

Bruce Yandle has spent a career combining sound analysis of current economic trends with a deep understanding of public choice theory. What else would you expect from the man who brought us “Bootleggers and Baptists”?

His argument was first made in a 1983 article in Regulation, then updated in 1999 in a follow-up article in the same magazine. Similar pearls of wisdom are found in Yandle’s latest quarterly economic outlook written for the Mercatus Center at George Mason University. In all of these discussions, the subject is political exchange — when and how it comes about — which often produces inefficient policies. It’s a theme that Ed and I discuss in detail in chapter 4 of Madmen and regularly on this blog.

Yandle explains his “Bootleggers and Baptists” theory as follows:

Durable social regulation evolves when it is demanded by both of two distinctly different groups. “Baptists” point to the moral high ground and give vital and vocal endorsement of laudable public benefits promised by a desired regulation. Baptists flourish when their moral message forms a visible foundation for political action. “Bootleggers” are much less visible but no less vital. Bootleggers, who expect to profit from the very regulatory restrictions desired by Baptists, grease the political machinery with some of their expected proceeds. They are simply in it for the money.

The theory’s name draws on colorful tales of states’ efforts to regulate alcoholic beverages by banning Sunday sales at legal outlets. Baptists fervently endorsed such actions on moral grounds. Bootleggers tolerated the actions gleefully because their effect was to limit competition.

Yandle offers much more than a clever label for an interesting phenomenon; it’s serious political theory, and it builds on other serious and important insights. For example, George Stigler told us why the traditional public interest theory of regulation was often naive, and he explained how and why certain groups would “capture” the process that ostensibly was to regulate them. Sam Peltzman went on to show that those who do the regulating must balance competing interests. As Ed and I describe it in chapter 4:

Stigler’s student Sam Peltzman builds a model of the policymaker’s rational calculations–balancing marginal political gains of a policy decision against its marginal political costs to the policymaker. And Peltzman integrates the interest group explanation of the demand for wealth transfers into his new model. In equilibrium, the policymaker will not simply grant the wishes of concentrated interests. Rather, he or she will weigh the relative political sway of groups supplying the wealth for transfer against the clout of groups demanding the wealth transfer.

It is here that Yandle’s “Bootleggers and Baptists” theory becomes so valuable. We see that political decisionmakers will sometimes encounter coalitions of normally opposing interests that have “united” to push for a policy that benefits them both. Such a coalition makes it easier for the politician to approve the policy, whether or not it is efficient.

And as Yandle likes to say, the examples are everywhere: In the 1970s, owners of coal-fired electric plants in the eastern United States teamed with environmentalists to ensure that the Clean Air Act would require expensive scrubbers on all coal-fired plants across the country, even though western plants generally burned the much-cleaner low-sulfur coal. Similarly, large pharmaceutical companies often find themselves in agreement with consumer groups that want the Food and Drug Administration to maintain extremely strict approval processes, which helps maintain market share for the large incumbents at the cost of serious impediments to innovative new drugs.

Looking ahead, Yandle’s December economic outlook warns that an Executive Order issued earlier this year by President Obama may point in the same direction. The directive seeks to “coordinate” the country’s energy policies, even as the United States is becoming the largest low-cost energy producer in the world:

Why aren’t people dancing in the streets? Why hasn’t Washington called off the subsidized hunt for alternative fuels? And why have Washington regulators just mandated 54.5 mpg American fleet fuel economy standards for the year 2025?

Obviously, there is more going on here than energy policy. On the environmental side, there is concern about the use of fracking in natural gas production, worry about climate change, and distress about carbon emissions. But this is just one side of a bootlegger/Baptist story. On the bootlegger side, there are petroleum, natural gas, and coal producers who are worried about the sudden change in relative energy prices, worried to the point that at the behest of President Obama they joined with environmentalists and government regulators in affirming an April 2012 presidential Executive Order that formed a public/private partnership to coordinate energy policies (some would say to cartelize production). Just as bootleggers and Baptists like Sunday closing laws that shut down legal outlets for booze, some environmentalists and energy producers like coordinated federal actions that limit production, keep prices high, and subsidize favored technologies.

Perhaps the interventions Yandle fears most will not come to pass. Nonetheless, it is a good idea to keep his warning in mind: “Bootleggers and Baptists” are everywhere. It’s also a great way to better understand the forces of political change.

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From the Pages of Madmen, Intellectuals, and Academic Scribblers (p.189, ch.7)

The most successful entrepreneurs know what they do well, they know the market and the opportunities within it, and they choose those activities that create the most value. This is true in economic as well as political markets.

From the Pages of Madmen, Intellectuals, and Academic Scribblers (p.178, ch.7)

[W]hen the right elements come together at the right time and place and overwhelm the status quo, it is because special people make it happen. We call them political entrepreneurs.

From the Pages of Madmen, Intellectuals, and Academic Scribblers (p.176. ch.7)

While we started this book with Danny Biasone saving basketball, we end it with Norman Borlaug saving a billion lives. These stories are not that different. Both faced vested interests, which were reinforced by popular beliefs that things should be a certain way—that is, until a better idea came along.

From the Pages of Madmen, Intellectuals, and Academic Scribblers (p.174, ch.6)

Because there was a general belief that homeownership was a good thing, politicians found the public with open arms.... Everybody was winning—except Alfred Marshall, whose supply and demand curves were difficult to see through the haze of excitement at the time, and except Friedrich Hayek, whose competition as a discovery procedure was befuddled... In short, once politicians started getting credit for homeownership rates, the housing market was doomed.

From the Pages of Madmen, Intellectuals, and Academic Scribblers (p.166, ch.6)

Everyone responded rationally to the incentives before them. In short, the rules that guided homeownership changed over time, which in turn changed the incentives of these actors. And bad things happened.

From the Pages of Madmen, Intellectuals, and Academic Scribblers (p.153, ch.6)

They understood the economics. The ideas had already won in ... the regulatory agency itself. All that remained to be overcome were some vested interests and a handful of madmen in authority.

From the Pages of Madmen, Intellectuals, and Academic Scribblers (p.146, ch.6)

If the idea for auctions of spectrum use rights had been part of the public debate since at least 1959, why didn’t the relevant institutions change sooner? What interests stood in the way?

From the Pages of Madmen, Intellectuals, and Academic Scribblers (p.121, ch.5)

When an academic scribbler comes up with a new idea, it has to resonate well with widely shared beliefs, which in turn must overcome the vested interests at the table. Many forces come together to explain political change, even though it may seem like coincidence of time and place.

From the Pages of Madmen, Intellectuals, and Academic Scribblers (p.120, ch.5)

It’s the rules of the political game that deserve our focus, not politicians’ personalities or party affiliations.

From the Pages of Madmen, Intellectuals, and Academic Scribblers (p.119, ch.5)

In short, ideas are a type of higher-order capital in society. Like a society that is poor in capital and therefore produces little consumer value, a society that is poor in ideas and institutions will have bad incentives and therefore few of the desirable outcomes that people want.